International reference payment model could save Medicare Part D over $70 billion

A new study from researchers at Johns Hopkins supports using an external reference pricing model to lower prescription drug costs, a move the authors say could have saved Medicare Part D up to $78.8 billion in 2018.

The paper, published in Health Affairs, finds that Medicare spending would be significantly reduced under an international reference pricing system, in which payments made by the U.S. government are informed by rates paid in other countries.

WHY THIS MATTERS

Currently, brand-name prescription drug prices are substantially higher in the United States than in other countries.

For this study, the authors compared the price differentials of 79 single-source, brand-name drugs (representing $56.6 billion in Medicare Part D spending in 2018, using the estimated U.S. post-rebate prices) between the U.S. and the U.K., Japan, and Canada. Prices for the medications, which ranged from diabetes medications to antivirals to immunosuppressants, were 3.2 to 4.1 times higher in the U.S.

According to the analysis, purchasing the same drugs at the average price for those sold in two or more reference countries would result in Medicare savings of $37.9 billion. Purchasing the same drugs at the U.K. pre-rebate price would have resulted in a reduction of $41 billion in Medicare spending. Even setting the U.S. price at three times the pre-rebate U.K. prices could result in savings of $19.8 billion.

Extrapolating the same price differentials to all single-source drugs in Part D could represent up to 78.8 billion in savings, the study finds.

THE LARGER TREND

Medicaid Part D drug spending is skyrocketing, and it's a huge problem for patients and providers alike.

The Trump Administration proposed last year to implement an international pricing index model for Medicare Part B. Under that proposal, private vendors would procure drugs, distribute them to physicians and hospitals, and take the responsibility of billing Medicare.

Instead of the current percentage-based add-on payment, physicians and hospitals would receive a set payment amount for storing and handling drugs that would not be tied to drug prices, removing the financial incentive to prescribe higher-cost drugs, according to the Department of Health and Human Services.

This model has met with resistance from some healthcare organizations which cite patient disruption and potential unforeseen consequences.

The Johns Hopkins study focuses on Part D, which accounts for 3.4 times greater Medicare spending compared to Part B. The authors present a number of options for implementation, including implementing external reference pricing as a pilot program for a subset of established drugs to test the effect of the policy in Medicare Part D, or regulating price increases for single-source brand-name drugs with prices that are higher than a given external reference pricing threshold.

ON THE RECORD

"[E]xternal reference pricing has potential for use in the U.S. within the market for established drugs," write the authors from the Johns Hopkins Bloomberg School of Public Health in Maryland. "Using external reference pricing to inform the US government and insurers about international prices would allow for greater price transparency and could suggest which specific drugs are outliers in the US compared to international prices."

Deirdre Fulton is communications professional and freelancer based in Maine.
On Twitter: @deirdrefulton